Breaking Free from Debt and Building Wealth Fast – Part 2: The Power of Compound InterestFeb 12, 2024
Debt is a word that sends shivers down the spine of many. It's a trap that can be all too easy to fall into, especially when success seems to be within reach…
This is part two in my series ‘Breaking Free from Debt and Building Wealth Fast’. In this blog post, I want to explore the power of compound interest – a powerful financial concept that can be both a friend and a foe.
In my personal journey, I've experienced both sides of this coin. Let me share with you how understanding compound interest shaped my financial decisions, especially when it came to mortgages and bank loans.
What is Compound Interest?
Compound interest is the interest calculated on the initial principal, which also includes all the accumulated interest from previous periods on a deposit or loan.
It can grow your savings exponentially over time, but it can also make your debts spiral out of control.
I discovered the magic of compound interest around 2003-2004 when I became obsessed with wealth building.
I realized that a simple investment of just a pound or a dollar a day at a 10% interest rate could grow to a million pounds in 56 years and five months.
The power of compound interest grows faster and faster, making it a powerful tool for wealth creation.
My Mortgage Story
I've had my share of mortgages, and I've learned some hard lessons.
In the early days, I always went for a 25-year mortgage because I could afford a bigger house with lower repayments. However, I didn't realize that the bank made more money from a 25-year mortgage due to the compound interest over a longer time.
In the first seven years of a typical mortgage, you only pay off about 10% of the capital. It's nearly all interest.
I found that I was working for the bank most of the time, and I only became debt-free when I finally understood this concept.
I learned to see things differently, especially after reading Robert Kiyosaki's "Rich Dad Poor Dad."
An asset is something that produces income, whereas a liability costs us money. I realised that my house was a liability, not an asset.
I learned to choose a 15-year mortgage over a 25-year one. The shorter term meant less interest paid to the bank, and it helped me clear my debts faster.
Compound Interest as Your Friend
Understanding compound interest has been a game-changer for me.
It helped me see the hidden costs of long-term mortgages and bank loans. It also showed me the potential for wealth creation through wise investments.
The lessons I've learned from my personal experiences with compound interest, mortgages, and bank loans have shaped my financial decisions and led me to a place of financial freedom.
I hope my story inspires you to take a closer look at your financial choices and leverage the power of compound interest to your advantage.
If you found this valuable and would like to learn more about value pricing, I run a free live online training session every month with a topic chosen by you. Attend live and you can ask me any questions you have. Click here to register and I will send you an invitation to the next session.
Wishing you every success on your pricing journey
Chartered Accountant, Public Speaker and Author of Amazon No.1 Best Seller “Effective Pricing for Accountants”